Krainer, John; LeRoy, Stephen F.; O, Munpyung - Federal Reserve Bank of San Francisco - 2009
We study optimal exercise by mortgage borrowers of the option to default. Also, we use an equilibrium valuation model … incorporating default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan … model's principal testable implication for default and mortgage pricing—that default rates and yield spreads will be higher …